Defending securities actions on behalf of clients requires strategy in navigating a tricky process, which can be unique in each situation. If you are interested in this topic, you likely already have some idea of the lay of the land from a regulation of federal securities standpoint.
When it comes to civil enforcement, we are primarily concerned with the SEC bringing action in a U.S. District Court or Administrative proceeding. District Courts, in general, provide defendants with a fairer fight by virtue of the presider, a neutral Article III Judge. In the Administrative forum, however, Administrative Law Judges are appointed and compensated through the SEC and the success rates by the SEC in these proceedings is high.
Once an exam begins, the SEC will ask for all manner of documents, and this is where a routine exam can quickly pivot in scope to areas wildly beyond any initial questions. And, present clients and their securities defense attorneys with major decision points as the enforcement process proceeds.
Decision Point 1: Cooperating with an SEC Investigation
In the voluntary request for documents circumstance, the first decision a party faces is to cooperate or not. Getting off on a negative foot with the SEC would seem to never be a good idea, but on the other hand, the SEC cannot compel the release of documents until the Commission has issued a formal order. For regulated entities and persons facing an exam, compliance is not voluntary.
The decision to comply at this early stage will be based on the specific facts and circumstances, and the scope of the requests and types of materials requested. The decision will need to be made without clearly knowing what cards the SEC may be holding.
If a party decides not to volunteer information, the SEC can obtain an order initiating a formal investigation naming officers and entities, giving the SEC the power to issue subpoenas for documents and to compel sworn testimony. At this formal stage, there's no question about whether a party should or should not comply. It must.
Decision Point 2: How to Respond
But now there’s a new decision point; the question becomes how to respond. Study the request with a qualified attorney to try to understand the scope of the investigation. There are often clues in the particular requests. In addition, ask the SEC for more clarification. But know that most SEC lawyers will not confide in you about what they are fishing for.
Decision Point 3: Wells Process
The next decision point may be around the Wells process. After initiating an investigation, the SEC may issue a Wells Notice, which states that the SEC believes there's been some violation of the federal securities laws and cites which laws. This is a fairly nebulous, boilerplate notice that recites statutory provisions that the SEC suspects have been violated without any factual description.
It's at this point that the party faces another decision point, how to respond.
Decision Point 4: Responding to the Wells Process
Lawyers tend to have a knee-jerk reaction that, of course, we respond to these outrageous claims of violations of the federal securities laws in a robust, brief-like writing. But the substantial expense associated with putting together a comprehensive response needs to be weighed in terms of the value proposition.
In some cases, it is better to face the complaint head on in a forum, especially when potential settlements come to light that reduce risk and cost from the client’s perspective. District Court and Administrative forums can be an opportunity for the client to tell their side of the story, which can have the effect of significantly reducing the extent of the allegations in the complaint. Clients have a tendency to just want to get on with the fight so they at least have the chance to defend and tell their side.
A related decision is whether to disclose a formal investigation to shareholders, investors, business partners and others, which is a topic for another day.
When settlement is an option, the type of settlement to pursue is based on a wide variety of factors including the nature of the securities violations that the SEC alleges and the status of the proposed defendants.
Does the violation touch on the sale of securities that were sold by our clients?
Will state Commissioners bring similar claims?
If a client settles with the SEC, are they opening the floodgates to the potential for private investor claims?
When facing decision points like these during an SEC inquiry or enforcement action, reach out to a qualified and experienced securities attorney.
This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above. Full transcript available at JonesKeller.com.
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